Long-term rates should rise by year-end, predicts Swiss Re Chief Economist, Kurt Karl
25 April 2012, New York
After today’s decision by the Federal Reserve to maintain the target Fed funds rate at zero to 25 basis points, Swiss Re’s Chief Economist, Kurt Karl, commented: “A strengthening US economy should push up the yield on the 10-year Treasury note this year and next."
Karl adds: "The expansion of the US economy continues despite the fragile state of the global economy. Employment has picked up, consumer spending is accelerating, and business investment continues to add to growth. Recent economic indicators for Europe have been mixed, but supportive of our view that the current recession will be mild and end by mid-year. The Fed is becoming more bullish on the US economy, but also remains committed to holding the Fed Funds rate low through late 2014 given the still-elevated unemployment levels. A further quantitative easing is unlikely, given the expected strength in the US economy in the second half of 2012 and into 2013. Thus, yields on the 10-year Treasury note are forecast to rise to 2.3% by end-2012 and be close to 3% by end-2013."
He continues: "Concerns have increased about Spain again recently. In many of the European peripheral countries, there is a risk that excessive fiscal tightening will deepen the recession. It is therefore important now to focus on a growth plan for Europe. Spain, for example, can afford some fiscal slippage without losing credibility as long as it continues its reforms vigorously, in particular cleaning up the banking sector. Overall, the risk of a disruptive event in the Euro area has receded, but the rising risk of an oil price shock has sustained the overall risk of another recession. Japan’s economy continues to recover from the tsunami, so will support the global economy this year with real GDP growth of 1.8%. The Bank of Japan has reinforced its loose monetary policy recently by introducing a price stability goal and increasing the total size of the Asset Purchase Program. China, India and Brazil are also either lowering rates or reserve requirements. Growth in China slowed to 8.1% in Q1 2012 from 9.2% in Q4 2011. The slowdown is mainly driven by lower export growth. By contrast, domestic consumption and investments remain strong. Our growth outlook for China remains unchanged at 8.5% for 2012."
The Swiss Re Group is a leading wholesale provider of reinsurance, insurance and other insurance-based forms of risk transfer. Dealing direct and working through brokers, its global client base consists of insurance companies, mid-to-large-sized corporations and public sector clients. From standard products to tailor-made coverage across all lines of business, Swiss Re deploys its capital strength, expertise and innovation power to enable the risk taking upon which enterprise and progress in society depend. Founded in Zurich, Switzerland, in 1863, Swiss Re serves clients through a network of over 60 offices globally and is rated "AA-" by Standard & Poor's, "A1" by Moody's and "A+" by A.M. Best. Registered shares in the Swiss Re Group holding company, Swiss Re Ltd, are listed on the SIX Swiss Exchange and trade under the symbol SREN. For more information about Swiss Re Group, please visit: www.swissre.com
The material and conclusions contained in this publication are for information purposes only and the author offers no guarantee for the completeness of its contents. The statements in this report may provide current expectations of future events based on certain assumptions. These statements involve known and unknown risks, uncertainties and other factors which are not exhaustive. The author of this report undertakes no obligation to publicly revise or update any statements, whether as a result of new information, future events or otherwise. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of this publication.
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